On June 25, authorities of the SouthGobi Resources LTD has officially announced to stop its exploration at the Ovoot Tolgoi coal mine site, located in Umnugovi aimag
within this month of 2012.
Although the Mineral Resources Authority of Mongolia has suspended exploration and mining activity on certain licenses in April of 2012
, the SouthGobi officials reported that there were no official notification had been received, thus the exploitation was ongoing normally. After the Company had announced to sell its 60% of controlling stakes
in the SouthGobi Resources for about 900 million USD to Aluminum Corporation of China Limited (CHALCO), the Government of Mongolia made some amendments on the draft legislation. The draft legislation on Regulation of the Foreign Investments in the Strategically Significant Industries
, which was approved at the plenary session of the State Great Khural (Parliament) on May 17, 2012, says the Foreign Investor’s Volume of an entity that runs its business within the Strategically Significant Industries shall not exceed 49%.
However, the Company’s current estimate for new coal sales for the second quarter of 2012 is between 200,000-300,000 tons, but for the third and fourth quarters of 2012 it was difficult to estimate the coal sales volumes, pricing and production volume outcomes. Thus, the Company has curtailed its mining activity at Ovoot Tolgoi Mine at various levels during the second quarter of 2012 to ensure the Company does not build significant unsold coal inventory and to maintain efficient levels of working capital. Also, SouthGobi has suspended uncommitted capital expenditure and exploration expenditure. These initiatives have been taken to preserve the Company’s financial resources.
Here below we have attached the latest update posted at www.southgobi.com on June 25, 2012.
SouthGobi Resources provides operating update
HONG KONG - SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (“SouthGobi”) operations continue to be effected by a number of external factors including regulatory issues in Mongolia and deteriorating market conditions.
Regulatory issues in Mongolia
On April 16, 2012, SouthGobi announced that the Mineral Resources Authority of Mongolia (“MRAM”) held a press conference announcing a request to suspend exploration and mining activity on certain licenses but no official notification had been received. At this time, the Company remains in the position where no official notification has been received and therefore there is no legal impediment to continued operation. However, SouthGobi continues to be impacted by issues associated with the public announcement regarding its licenses.
There are multiple ways SouthGobi is being affected by the uncertainty over its licenses with various levels of impact. Many government bodies and regulatory authorities in Mongolia are reluctant to provide approvals and permits due to the uncertain position. One example is that SouthGobi’s Mongolian operating subsidiary has been unable to receive an approval for a revision to its Environmental Impact Assessment for the dry coal handling facility (“DCHF”) from the Mongolian Ministry of Environment. Without such approval, SouthGobi may be unable to operate the DCHF.
The Mongolian Minister of Mineral Resources and Energy (“MRE”) commented at a press conference on May 30, 2012 “the temporary suspension has been lifted, but regarding the new law, the license of Ovoot Tolgoi will be discussed by the cabinet and parliament.”
Subsequently we have written to MRAM and the MRE requesting official clarification. However, to date no such clarification has been received.
China market conditions
For late 2011 and through most of 2012, coking coal prices in the inland China markets closest to SouthGobi’s operations remained fairly stable and somewhat insulated from the price declines of reference coking coal prices in the seaborne market. However, in recent weeks the Company has observed a substantial deterioration in sentiment among its customers and a decline in reference prices in key end-use markets. For example, after remaining constant for all of 2012, the reference price for one-third coking coal in Wuhai, Inner Mongolia fell by RMB20/tonne on April 23 and then fell a further RMB30/tonne on June 18. Further east in 2 Baotou, Inner Mongolia, the reference price for clean coking coal started falling in late May and has now fallen by RMB110/tonne.
Customer behaviour and impact on SouthGobi’s sales and operations
Most of SouthGobi’s coal is sold to its largest customers on the basis of quarterly sales agreements. Customers agree to purchase coal according to their projected volume and specification requirements. The sale is completed when the Company delivers the coal into a customs-bonded stockpile facility at the Ovoot Tolgoi Mine for the customers to manage their own collection and export.
During the second quarter of 2012 customers were reluctant to enter into meaningful new purchase commitments for a number of reasons, including:
(i) Customer’s ability to transport so far this year was below their projections due to: the delay in the opening the expanded border crossing capacity by authorities until May; extended border holiday closure in the first quarter; and the closure of the export road for over four weeks in April and May for repair. As a result, customers accumulated more inventory of pre-purchased coal on the Mongolian side of the border.
(ii) Lack of clarity over whether SouthGobi may receive a formal license suspension at some stage has customers fearful that they would be unable to collect and export additional purchased coal from Ovoot Tolgoi Mine.
(iii) Deteriorating market conditions.
SouthGobi’s customers have been focused on physical shipment and now that the border capacity expansion is open physical coal transportation is well above prior records. The Company expects that for June alone (the first full month with expanded border capacity), approximately 500,000-600,000 tonnes of Ovoot Tolgoi Mine coal will be transported to China, albeit mostly coal from customer inventory. However, the Company’s current estimate for new coal sales for the second quarter of 2012 is between 200,000 tonnes and 300,000 tonnes. In terms of operations, SouthGobi has curtailed its mining activity at Ovoot Tolgoi Mine at various levels during the second quarter of 2012 to ensure the Company does not build significant unsold coal inventory and to maintain efficient levels of working capital. SouthGobi currently estimates that total coal mined for the quarter will be approximately 200,000 tonnes. As at the end of the quarter, the operation will be entirely curtailed.
At this time SouthGobi believes it is difficult to estimate coal sales volumes and pricing for the third quarter of 2012. It does appear that customers have robust volume appetite for the third quarter, particularly as the Company’s largest customer has now exhausted pre-purchased coal inventory. However, achieving mutually agreeable contracts is difficult in the context of the regional coking coal market conditions.
With the difficult conditions of the second quarter and the uncertainty regarding how the third quarter may evolve, the Company cautions that at this time sales volumes, pricing and production volume outcomes for the full year of 2012 cannot be estimated.
In addition to the curtailment of mining operations, SouthGobi has suspended uncommitted capital expenditure and exploration expenditure. These initiatives have been taken to preserve the Company’s financial resources.